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Interpreting the Forward Premium Anomaly


  • David K. Backus
  • Silverio Foresi
  • Chris I. Telmer


One of the central issues in international finance concerns the forward premium anomaly: changes in spot exchange rates are inversely related to the premium of forward rates over spot rates. The authors construct a numerical example of a theoretical economy with this property and discuss its potential as an explanation of the anomaly.

Suggested Citation

  • David K. Backus & Silverio Foresi & Chris I. Telmer, 1995. "Interpreting the Forward Premium Anomaly," Canadian Journal of Economics, Canadian Economics Association, vol. 28(s1), pages 108-119, November.
  • Handle: RePEc:cje:issued:v:28:y:1995:i:s1:p:108-119

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    References listed on IDEAS

    1. David E. Bloom & Morley Gunderson, 1991. "An Analysis of the Earnings of Canadian Immigrants," NBER Chapters,in: Immigration, Trade, and the Labor Market, pages 321-342 National Bureau of Economic Research, Inc.
    2. Chiswick, Barry R, 1978. "The Effect of Americanization on the Earnings of Foreign-born Men," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 897-921, October.
    3. Mincer, Jacob, 1978. "Family Migration Decisions," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 749-773, October.
    4. Baker, Michael & Benjamin, Dwayne, 1994. "The Performance of Immigrants in the Canadian Labor Market," Journal of Labor Economics, University of Chicago Press, vol. 12(3), pages 369-405, July.
    5. Alan G. Green & David A. Green, 1995. "Canadian Immigration Policy: The Effectiveness of the Point System and Other Instruments," Canadian Journal of Economics, Canadian Economics Association, vol. 28(4b), pages 1006-1041, November.
    6. Charles M. Beach & Christopher Worswick, 1993. "Is There a Double-Negative Effect on the Earnings of Immigrant Women?," Canadian Public Policy, University of Toronto Press, vol. 19(1), pages 36-53, March.
    7. John M. Abowd & Richard B. Freeman, 1991. "Immigration, Trade, and the Labor Market," NBER Books, National Bureau of Economic Research, Inc, number abow91-1, January.
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    Cited by:

    1. Matos, Paulo Rogério Faustino & Costa, Carlos Eugênio da & Issler, João Victor, 2007. "The forward- and the equity-premium puzzles: two symptoms of the same illness?," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 649, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    2. Moore, Michael J. & Roche, Maurice J., 2002. "Less of a puzzle: a new look at the forward forex market," Journal of International Economics, Elsevier, vol. 58(2), pages 387-411, December.
    3. Peiris, M.Udara & Polemarchakis, Herakles, 2015. "Quantitative Easing in an Open Economy : Prices, Exchange Rates and Risk Premia," CRETA Online Discussion Paper Series 09, Centre for Research in Economic Theory and its Applications CRETA.
    4. Lafuente, Juan A. & Pérez, Rafaela & Ruiz, Jesús, 2016. "Monetary policy regimes and the forward bias for foreign exchange," Journal of Economics and Business, Elsevier, vol. 85(C), pages 13-28.
    5. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2009. "Time-Varying Risk, Interest Rates, and Exchange Rates in General Equilibrium," Review of Economic Studies, Oxford University Press, vol. 76(3), pages 851-878.
    6. Kumar, Satish & Trück, Stefan, 2014. "Unbiasedness and risk premiums in the Indian currency futures market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 13-32.

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